Housing Bubbles

There are virtually no signs of weakness in the housing sector. Aggregate
sales data along with results from individual homebuilders continue to outpace
estimates. Data released on Monday revealed that home buying continues as the
national past-time. New home sales dropped slightly to an annualized rate of
1.145 million homes. While the pace of sales has dropped by 55,000 homes from
the peak in June 2003, Septembers pace was the third highest on record and
20,000 higher than economists predicted. Existing home sales were even stronger.
The 6.69 million annual rate in September was a new record. A Bloomberg article
discussing existing home sales put the strength into perspective with the follow
statistic, "For the first time ever, the pace of sale for three straight months
has exceeded 6 million, 50 percent above the 1990s average."

There has been quite a bit of debate over whether or not there is a housing
bubble. One more piece of the puzzle to consider is whether people are "trading" houses
more than before. The chart above shows the housing turnover on an annualized
basis. There have been numerous anecdotal stories about homeowners "flipping" their
houses recently. The latest data on home sales shows that housing turnover
is at record highs. This was calculated by dividing existing home sales by
total number of housing units. The amount of housing turnover previously peaked
in 1978 at just under 5%. As interest rates exploded in the late 1970s and
early 80s, home sales fell by 50% before bottoming in 1982. Starting in 1983
the turnover rate started to be consistent between 2.8% and 4% until 1998.
After stabilizing around 4.3%, the turnover jumped to about 4.8% last year
and this quarter soared to 5.5%. While home sales have been strong for several
years, this provides further evidence that it has reached an extreme level.

(There was a revision of the total housing unit's data following the 2000
Census. This revision lowers the number of total housing units, which resulted
in the turnover increasing roughly 0.2 percentage points.)

On Tuesday, more economic data pointed to a growing economy. Durable goods
orders increased 0.8%, which was below economists' forecasts of 1.0%, durable
goods orders excluding transportation were 1.2%, stronger than the 1.1% forecast.
While September order pointed to a growing economy, the market focused on the
revisions to August data. August durable goods orders were revised from -0.9%
to -0.1% and excluding transportation, orders increased 0.7% from a previously
released decline of 0.3%. Additionally, ex-defense orders increased 2.6%, the
highest growth rate since June 2003. Computers and electronics orders increased
2.6%, which was the fourth consecutive month of 2.0% or better growth.

Consumer confidence increased 4.1 points to 81.1 in October according to the
Conference Board, higher than economists expected. While the headline number
was not spectacular, it remains below August's reading, the present situation
component increased for the first time since April. Most notable was that employment
is getting better through the eyes of consumers. There are five questions that
focus on employment, all showed improvement. Those that thought jobs were not
plentiful fell to 54.4%, which is the lowest since September 2001. The outlook
six-months out is even rosier. Those expecting more jobs will be available
jumped 3.1 points to 19.7%. This is the highest degree of optimism since June
2002. Even thought more consumers are expecting more jobs to be created, most
continue to see pressure on wages. Only 16.7% expect income in increase and
10.9% expect income to decline. Lastly, it appears consumers were waiting for
the new model year automobiles to be introduced. Last month, those anticipating
purchasing a vehicle fell to eight-year lows.

Perhaps the biggest non-event of the week was Tuesday's FOMC meeting. Since
nobody expected the Fed to change the target Fed Funds rate, the focus was
on the wording of the FOMC statement. Last week, Treasury Secretary Snow suggested
that higher interest rates would be indicative of a strengthening economy and
should not be a cause of concern. There was a chance that this would start
the process of priming the market into anticipating higher rates in the future.
But that clearly was not the case. The Fed maintained that "the risk of inflation
becoming undesirably low remains the predominant concern for the foreseeable
future" and "that accommodation can be maintained for a considerable period." In
fact, the only passage that changed from the September release was the statement
regarding the labor market. In October, employment "appears to be stabilizing" compared
to "weakening" in September. Unfortunately, this accommodative monetary policy
is flooding the world with US dollars. Basic economics dictates that an increase
in supply without a corresponding increase in demand will cause the price to
drop. This is what is happening to the dollar, which recently grabbed the attention
of Warren Buffet. In the next edition of Fortune, Buffet said that starting
last year he purchased foreign currencies for the first time in his life.

After Tuesday, the focus shifted to Thursday's release of third quarter GDP.
Economists are now forecasting 6.0%, just a few weeks ago it was 5.2%. As long
as GDP grew faster than 5.0% in the third quarter it will be the fastest rate
of growth since hitting 7.1% in the fourth quarter of 1999. If it happens to
eclipse 7.1%, it will be the fastest pace since 1984. Of the 73 estimates comprising
Bloomberg's survey there are four estimates that are 7.1% or faster. Usually
this rapid growth would cause interest rates to rise, but as detailed above,
the Fed is hell-bent on keeping rates low.

Corporate earnings have continued at the same pace. With about 75% of companies
reporting third quarter results, 65.6% have bettered analysts' estimates with
only 12.9% coming short. One negative surprise was from Sonic Automotive. Sonic
earned $0.66 per share in the third quarter, $0.15 below analysts' estimates.
The auto dealer said that, "domestic branded dealerships, particularly Ford
and Chrysler/Jeep/Dodge, sharply under performed." I did enjoy the following
quote from a Raymond James report discussing Sonic Automotive's third quarter
results. "We continue to believe higher valuations, rising expectations, and
risks to the fourth quarter do not present an attractive risk-reward for investing
in auto retail stocks. We therefore maintain our Market Perform rating
on Sonic." My only guess is Raymond James expects the market to sell off over
the next couple months.